On January 30th, the new FHFA requirements were proposed regarding minimum financial eligibility for Seller/Servicers that do business with Fannie & Freddie.
Following the release of the 2015 FHFA scorecard criteria for Freddie Mac and Fannie Mae, new minimum eligibility requirements have been proposed to overcome unnecessary risks by the GSE’s. The FHFA has developed the new proposals for mortgage sellers and servicers in business with Fannie and Freddie in effort to strengthen the GSE’s standards, making them sounder and with a greater amount of safety. According to Fannie and Freddie here, they took into consideration the amount of financial risk of doing business with Sellers and Servicers, based on the results of their research and analysis, they consulted the FHFA to propose regulations that would ensure enough capital was available should they need to compensate for losses, and provide enough liquidity to cover loans by the two GSE’s. The new requirements seek to give the whole industry more clarity about the requirements for the Seller/Servicer, as well as create a more consistent framework for eligibility. In addition, the proposal will support the consistency of requirements by both Freddie and Fannie, with the standards remaining subject to their discretion where it deems appropriate. Having introduced WHY the requirements are being proposed, let’s look at WHAT the new requirements would look like.
There are three categories being proposed for immediate implementation:
The net worth of a Seller/Servicer will need to be a minimum base of $2.5 million, with 25 basis points of UPB for total loans serviced.
- CAPITAL RATIO
The tangible net worth/total assets for Non-Depository Sellers/Servicers must be at least 6% or greater.
While depository Seller/Servicers will continue complying with normal regulatory standards, non-depository Seller/Servicers would need to adhere to the following requirements:
- Total agency servicing between Freddie, Fannie, and Ginny must bear a minimum of 3.5 basis points.
- 200 basis points of total nonperforming Agency servicing above the 6% of the total Agency servicing UPB
- Allowable assets could include:
- Unrestricted, Cash and Cash Equivalents
- AFS or HFT Investment Grade Securities, such as:
- Agency MBS
- GSE obligations
- US Treasury Obligations
- Available portion of promised servicing advance lines, not currently in use, which would require a quarterly certification of information by a CFO.
- Allowable assets could include:
If Seller/Servicers do not have all criterion met, they will not be able to service a loan for Freddie Mac nor Fannie Mae. However, some exceptions may be made if there was adequate proof that the criteria could be met via other support, for example a parent company that carries creditworthiness. Compliance with Seller/Servicers will be audited quarterly to ensure requirements continue to be met. If a Seller/Servicer believes it falls outside the area of these requirements, it needs to contact the Customer Account Manager for either GSE.
The FHFA is expecting the new proposal to be finalized as early as the second quarter of this year. Once finalized, it will go into effect six months later. In the meantime, the FHFA, Fannie, and Freddie will be diligently reaching out to Seller/Servicers educating them on the upcoming minimum requirement proposal to prepare them for the date it becomes effective.